Friday, July 27, 2012

Stocks snap higher, Dow crosses above 13,000 - Denver Post

NEW YORK—Faced with Facebook, Starbucks and Angela Merkel, the market chose to focus on Merkel.

For a second day, the U.S. stock market powered higher after European leaders, including German chancellor Merkel, pledged to protect the union of 17 countries that use the euro. The Dow Jones industrial average blew past 13,000, a key psychological marker that it hadn't hit since early May.

It wasn't that there weren't any troubling signs about the economy. In fact, they abounded: U.S. economic growth was anemic in the second quarter. A measure of consumer sentiment fell in July as people worried about their job prospects. And Facebook and Starbucks dropped sharply after reporting disappointing quarterly results.

But on this day, investors homed in on a couple of remarks coming from Europe.

Most notably, Merkel and French president Francois Hollande released a joint statement saying they were "determined to do everything to protect the eurozone." That followed a similar pledge the day before from Mario Draghi, the president of the European Central Bank.

Merkel's statement was closely watched because Germany will have to sign on if any plan to keep the euro countries together is to succeed. As one of the stronger countries, Germany usually foots the bill for bailing out the weaker ones.

For all the rejoicing, a longstanding roadblock remains: Strong countries like Germany want other European nations to agree to cut spending. Weaker countries like Greece are resisting. The statement from Merkel and Hollande made clear that individual countries aren't off the hook, but "must comply with their obligations"—meaning a showdown over spending cuts is still possible.

"Talk is cheap," said Michael Strauss, chief investment strategist and chief economist at the Commonfund investment firm in Connecticut. "While there's some euphoria over this, at the end of the day, is Spain going to still be in a recession? Yes. Is Greece still going to be in a recession? Yes. So I wouldn't get too carried away."

Others said they were heartened that Europe appeared to be fleshing out more of the details of its plans. Leaders recently agreed that Europe's bailout fund could give money directly to banks, rather than slowing down the process by going through a country's government. Investors also hope that Draghi's remarks mean that Europe's powerful central bank will buy the bonds of distressed countries like Spain and Italy, lowering their borrowing costs.

"In our estimate, this is the first real step in the right direction that Europe has taken in terms of concrete plans," said Mitch Schlesinger, chief investment officer of FBB Capital Partners in Maryland. "Everything to date has been very politically motivated and kicking the can down the road. These are things that actually make a difference."

Jim Millstein, CEO of the Washington, D.C., financial advisory firm Millstein & Co., said investors shouldn't be surprised if any rescue plan takes a long time. The eurozone countries currently function with no real unity on their fiscal policies, even though they use the same currency.

"They are engaged in a very difficult project, which is to transform a monetary union into a fiscal union, and that is a cumbersome process," Millstein said. "It takes longer than the markets might otherwise like."

But the markets liked what they heard Friday. The Dow obliterated the 13,000 mark, climbing 187.73 points to 13,075.66. In two days, it's climbed 400 points.

Bond trading was also a study in optimism. The yield on the benchmark 10-year Treasury note jumped to 1.54 percent from 1.44 percent the day before. That means investors are feeling more confident about the economy and more willing to put their money in the stock market instead of low-risk government bonds.

In other positive signs, the euro rose against the dollar, stock indexes moved higher in Europe—including a 4 percent leap in Spain's benchmark index—and borrowing costs fell for Italy and Spain.

But there were plenty of red flags for anyone looking for them. The government reported that the U.S. economy grew at an annual rate of just 1.5 percent in the second quarter, a paltry number that likely isn't enough to bring down the unemployment rate. The government also said consumers pulled back on their spending. The Thomson Reuters/University of Michigan index of consumer sentiment fell in July as people worried about job prospects.

— Starbucks fell 9 percent, losing $4.94 to $47.47. Investors were disappointed that the company cut its outlook for the current quarter, and is considering closing unprofitable stores in Europe.

— Facebook fell 12 percent, giving up $3.14 to $23.70. Investors were disappointed that the company, in its first quarterly report since going public, reported a slowdown in revenue growth. It has now lost nearly 38 percent of its value since its initial pricing at $38.

NEW YORK (Reuters) - Stocks rallied on Friday on expectations the European Central Bank will tackle high borrowing costs hitting Spain and Italy, but the euro pared gains on market uncertainty about the specific action to be taken.

The benchmark S&P 500 closed at its highest since early May, climbing further after Bloomberg News said ECB President Mario Draghi will meet with Bundesbank President Jens Weidmann to discuss several measures, including bond purchases, to help the euro zone.

The French and German governments said they are "determined to do everything to protect the euro zone" and its single currency. The joint statement echoed similar remarks by Draghi on Thursday, but in comments on Friday, Germany's Bundesbank pushed back against Draghi's pledge.

Adding to hopes for decisive action, U.S. Treasury Secretary Timothy Geithner will meet separately with his German counterpart and Draghi on Monday, the Treasury Department said.

"Fundamentally, there is a lot of uncertainty, and still a lot of unanswered questions as to how exactly the ECB plans to bring down sovereign borrowing costs," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"To some extent, the rally in the euro and more broadly equities and risk assets had gotten a little bit ahead of itself."

Expectations that the Federal Reserve will act to support the U.S. economy also grew after data showed U.S. gross domestic product expanded at a 1.5 percent annual rate from April through June, roughly in line with lowered expectations.

Market expectations are high for another round of asset purchases from the Fed, which in the past have sparked rallies in stocks and commodities. Markets are also beginning to price in a move from the ECB, possibly in the form of bond purchases. Both central banks hold separate meetings next week.

The FTSEurofirst 300 advanced 1.3 percent to close at 1,056.51. An MSCI index of global equities added 1.8 percent to end at 1,250.02.

Copper prices jumped 1.3 percent while Brent and U.S. oil prices rose for a fourth day running, although they were both still lower for the week after plummeting on Monday.

The euro pared most of its gains after hitting a three-week high versus the U.S. dollar. It was last up 0.3 percent at $1.2318, after hitting a session high of $1.2389. On Tuesday, the single currency slid to a two-year low of $1.2040.

In his statement on Thursday, Draghi appeared to target the bond market, saying the monitoring of rising borrowing costs in bloc members was within the ECB's mandate.

Ten-year Spanish bond yields hit a low of 6.731 percent, the lowest since July 17, while the Italian benchmark bond yield dipped below 6 percent for the first time in a week.

As investors turned toward relatively riskier assets, safe-haven investments fell. The benchmark 10-year U.S. Treasury note slid 29/32, or nearly a full point in price, while the yield rose to 1.534 percent.

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The FTSE 100 extended Thursday’s gains this morning following a rally on Wall Street, where the Dow Jones Industrial Average added 212 points, which was its biggest daily gain of July.

The UK’s blue chip index stood at 5,582 in early afternoon, up 10 points (0.2 percent) from Thursday’s close.

Yesterday, risk sentiment was boosted by positive US data, which showed that claims for unemployment benefits fell more than expected last week, and European Central Bank (ECB) president Mario Draghi’s pledge that the central bank will do all that’s necessary to save the euro.

However, Bundesbank said today that purchases of euro zone bonds by the ECB would amount to funding governments, which is forbidden by European laws.

“There is no doubt that his remarks were aimed letting financial markets know where the ECB stood and how committed it is,” said chief economist at FXPro Simon Smith.

“Even if not immediately, the ECB will have to follow through because words alone won’t be enough to keep bond yields down. We’ve had more than enough of that over the past two years.

“The other issue is whether the ECB pushes the boundaries of its mandate, buying bonds without fully sterilising the purchases, which would align its policy more closely with the quantitative easing of other central banks.”

Traders are now looking to today’s US economic data, which will include the second quarter estimate for the US GDP and the final reading of the University of Michigan’s consumer confidence index.

Equities received more support from a report in Le Monde, which said we could soon see joint action by the ECB and euro zone governments to curb growth in borrowing rates. The report said the plan currently under consideration would see the ECB and the European Stability Mechanism (ESM) bailout fund buy Spain and Italian debt.

Traders are now turning attention to the other side of the Atlantic, where the Commerce Department will release the second quarter US GDP estimate, which will be followed by the final reading of the University of Michigan’s consumer confidence index.

Banking group Barclays (LON:BARC, up 6.6pct at 163.75p) topped the FTSE 100 leaderboard this morning after reporting forecast-smashing interim figures, which showed that its profits topped £4 billion in the first half of the year.

The bank also apologised for the Libor rigging scandal, which led to the ouster of its chief executive Bob Diamond and chief operating officer Jerry del Missier.

Sector peers RBS (LON:RBS, up 2pct at 212p) and Lloyds (LON:LLOY, up 1pct at 29.41p) rose in sympathy.

Yesterday’s top riser in the FTSE 100, broadcaster ITV (LON:ITV, up 3.8pct at 78.7p), again was on the rise today.

Shares in broadcaster got a boost from a decision to double interim dividend to 0.8 pence per share and a strong performance of its production arm ITV Studios, whose revenues jumped 34 percent in the first half.

Other notable risers in the top flight included engineering group Weir (LON:WEIR, up 3.1pct at 1,649p), Russian steelmaker Evraz (LON:EVR, up 1.9pct at 224.8p) and cruise operator Carnival (LON:CCL, up 1.8pct at 2,121p).

Investors also bought retailers Kingfisher (LON:KGF, up 1.8pct at 266.3p) and Marks & Spencer (LON:MKS, up 1.7pct at 329p).

Mining giant Anglo American (LON:AAL, down 3.8pct at 1,889p) and Financial Times publisher Pearson (LON:PSON, down 3.8pct at 1,245p) slid to the bottom of the FTSE 100 pile after their interim results disappointed.

Anglo said its pre-tax profits plummeted 55 percent in the first half due to “markedly weaker” commodity prices.

US markets

Financial bookmakers are expecting US stocks to rise in early trade on the back of today’s positive US GDP data, which showed that the US economy expanded at an annual rate of 1.5 percent in the second quarter, while the estimate for the first three months of the year was revised up to two percent.

Later in the day, the University of Michigan will release its consumer confidence index for July. A Bloomberg News survey projected a decline to 72 from 73.2 in June, which would be the lowest reading this year.

On the corporate front, shares in Facebook (NASDAQ:FB) tumbled 13 percent to US$23.29 on top of yesterday’s loss of US$2.5 (8.5 percent) after the social network released a weaker than expected earnings report.

Mark Zuckerberg’s firm posted a 32 per cent increase in revenues to US$1.18 bln in the three months to June 30, but growth was the slowest seen since the first quarter of 2011.

Facebook made a net loss of US$157 mln, or 8 cents a share, in the quarter owing to tax charges after going public.

Underlying profits excluding the fees rose 3.5 per cent to US$295 mln, or 12 cents per share, from US$285 mln in the second quarter last year in line with Wall Street estimates.

Capital expenditure tripled to US$413 mln last quarter and the company warned that operating expenses would be higher in the second half of 2012 than last year.

UK corporate news

In other news in the FTSE 100, Fashion house Burberry (LON:BRBY, down 1pct at 1,265p) told investors that it is no longer in talks over the termination of its licence agreement with Interparfums SA.

Earlier this month, Burberry decided to end the agreement with Interparfums, the exclusive worldwide licensee for its fragrance and beauty products, to “maintain flexibility in pursuing its objective to develop fully this business in the future”.

Upon termination, which will take effect at the end of the year, Burberry will pay Interparfums €181 million in cash.

The two companies had been in talks regarding the potential establishment of a new operating model for the Burberry fragrance and beauty business.

Fellow blue chip, water group United Utilities (LON:UU., down 1pct at 694.5p) reported that it has been trading in line with forecasts and expects to meet its targets over the 2010-15 regulatory period.

“We have reported another good set of results in a tough economic climate and have delivered significant improvements in customer satisfaction. We are also confident that we can improve further,” said chairman of United Utilities John McAdam.

The group proposed a final dividend of 21.34 pence per share, taking the total dividend for the year to 32.01 pence.

It's no surprise. Many adults are wary of banks and credit card companies in the wake of the economic crash and many fear another cataclysm is around the bend. Now a new study shows banks and other financial institutions are losing the popularity contest with teens.

"A healthy skepticism about financial institutions has soured into cynicism, where teenagers almost expect to be victimized by financial firms," economists Michael E. Staten and Dan Iannicola Jr. say in an article titled Warm and Fuzzy Financial Ed Doesn't Cut It Anymore.

The poll of 878 students at 18 high schools in 11 states "shows that the majority strongly distrusted financial institutions even while expressing great confidence in other things like their likelihood to find employment and to achieve financial security."

"For example, 60 percent of students polled firmly believe that credit card companies often entice people into taking on more debt that they can handle, while 70 percent believe that businesses try to 'trick' young people into spending more than they should," the article states. "Only 25 percent of students disagreed with the statement, 'the stock market is rigged mostly to benefit greedy Wall Street bankers,' and only 17 percent disagreed with the statement, 'banks are mostly interested in getting my money through hidden fees.'"

The study also found teens lacking in some basic knowledge when it comes to personal finance. For instance, 68 percent did not know that owning stocks is a riskier form of investment than owning government bonds, and more than half didn't know that a high credit score is better than a low score.

It's not surprising that banks and financing companies aren't winning any popularity contests with teens. But like many financial literacy educators, I'm concerned that kids aren't learning strong life skills to manage their finances.

The habit teens develop today can get them into financial trouble tomorrow.

Our children are bombarded with advertisements and pressured to "keep up with the Joneses" by having the latest fashions, gadgets, and toys. With purchases just a few clicks away on their computers or smart phones, teens are constantly enticed to make impulsive purchases. Direct deposit, debit cards, credit cards, and online banking have each accelerated the pace of money transactions -- and accordingly, the speed at which our children can make right, or wrong, financial choices.

Kids need a clear, alternative vision to the "spend, spend, spend" mentality that surrounds them. Fortunately, there are things parents can do to teach their kids responsible money management habits and help them avoid future debt to credit card companies and banks and the unnecessary risks propagated by Wall Street.

By sharing these financial lessons with our kids starting at an early age, we can help them understand the importance of being financially responsible and self-sufficient for life:

Teach children the difference between needs and wants -- Share your full family financial picture, including what you earn, what you spend, what you borrow, and how you invest and save. Hold regular "family night" discussions with them to go over the family budget and review where the money is going. You can even have your kids participate by writing checks, reconciling accounts, and helping to set and monitor your family budget.

Teach by example -- If you tell your kids one thing, but do another, they will catch on very quickly. Explain how there are things you'd like to buy that you decided to forego and why. Don't be afraid to openly discuss the financial mistakes you've made and what you've learned from them.

Allowances are a great idea, as long as they are tied into chores -- The earlier children learn basic financial principles, such as the exchange of goods and services for money, the better. Nothing builds a child's self-esteem faster than self-reliance. The amount your child receives for chores should be based on their age as well as what you expect them to use the money for.

Use the "40/30/20/10 Savings Rule" -- 40 percent of kids' earnings can be used for spending, 30 percent should be set aside for short-term savings, 20 percent for long-term savings, and 10 percent for donating. If children sort their money into these categories every week, they will develop responsible lifelong money management skills at an early age.

The fact that teens are more wary than ever about banks, credit card companies and Wall Street shouldn't be a stumbling block to teaching them principles of financial literacy and independence. Erratic markets and gloomy headlines can provide teachable moments. When teaching kids about money, parents should avoid expressing cynicism and instead stress that young people can take control over their fiscal future. Help kids envision a bright future and formulate their own vision of self-reliance and freedom by providing the tools and habits they need to achieve their financial goals.

As a consultant to financial advisers, Pamela Yellen investigated more than 450 savings and retirement planning strategies seeking an alternative to the risk and volatility of stocks and other investments. Her research led her to a time-tested, predictable method of growing and protecting savings now used by more than 400,000 Americans. Pamela's book, Bank On Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future, is a New York Times Bestseller. Learn more at www.BankOnYourself.com

SAN FRANCISCO -- Social media companies, once hailed by their Silicon Valley boosters as world-changing businesses with limitless potential, are instead proving a sobering reminder of how investors can be seduced by Internet hype.

With few exceptions, the first wave of social media firms to trade on the public markets has delivered a disastrous performance that conjures memories of the dot-com bust of 2000.

"Farmville" publisher Zynga, which went public in December at a valuation of $7 billion, is trading around $3.15 a share, more than 68 percent off its $10 IPO price.

Daily deals site Groupon, touted as the firm that could reinvent local commerce, has fallen from its $20 IPO price to about $7.15 in nearly nine months. Oakland-based music service Pandora Media has dropped from $16 at its June 2011 IPO to around $9.50 on Friday.

And on Thursday, the 800-pound gorilla of the group, Facebook, reported tepid results that shaved some $10 billion off the company's market cap. The stock has gone straight down since its botched May initial public offering and now trades at around one-third off its $38 IPO price.

"The VCs, the private equity guys at the early stages, already cashed out and made their fortunes," said Peter Schiff, chief executive of Euro Pacific Capital. "Everybody else who ran to buy the stock at the IPO at

a sky-high valuation ended up holding the bag."

"A lot of these companies are going to make a quick buck and flame out," he added. "Just look at 10 years ago."

It's true that a few companies with more of a business focus -- notably LinkedIn -- have done much better. The jobs-networking site is trading at $100.82, well above its $45 IPO price from May 2011. Yelp, the San Francisco local reviews company, is holding above its $15 IPO price from March.

Startups in areas like data analytics and business software, such as Splunk Inc have also fared well.

But the wipe-out among consumer-oriented social media companies has raised concerns the entire sector is fad-driven. While the public companies are profitable and showing strong growth -- unlike the class of 1999 and 2000 -- it is not clear how sustainable that is.

"People just can't figure out how these companies are going to make money and justify these huge valuations," said Michael Yoshikami, founder of Destination Wealth Management.

The euphoria around Internet stocks, Yoshikami added, has faded. "It's different from six months ago," he said.

In Silicon Valley, venture capitalists fear the high-profile stock busts will take a toll on the next wave of companies trying to go public. To some extent, they say, they already have.

"It's going to have a chilling, sobering effect," said Tim Chang, managing partner at Mayfield Fund. "It's especially hard to make the argument of why a company should be valued at $1 billion or more."

On Thursday, Menlo Park-based Facebook reported its first quarterly revenues of $1.18 billion, up 32 percent. But executives warned a quickening shift to its underperforming mobile app was eating into results, and user and revenue growth slowed for the fifth consecutive quarter. The stock was down 9 percent in afternoon trading on Friday.

It has not helped pacify Wall Street that the tech firms' venture capital backers on Sand Hill Road in Menlo Park have enjoyed big paydays via IPOs. In the case of Facebook, Accel Partners sold 49 million shares at $38 apiece, reaping enormous profits.

Insiders have sold large chunks of their holdings in Zynga and Groupon, though the top executives still maintain enormous stakes in their companies. Zynga CEO Mark Pincus and other insiders netted some $500 million when they sold a portion of their stock in April at $12 a share.

Others were less fortunate. T. Rowe Price lost $61.4 million in its Facebook and Zynga holdings over two days. Fidelity, the largest U.S. fund, saw $126 million of its on-paper holdings evaporate over the past two days.

Facebook CEO Mark Zuckerberg, who owns just north of half a billion shares, took his lumps as well, as more than $3 billion of his paper-weath evaporated Thursday.

Zynga's stock went into free-fall after the San Francisco company slashed its 2012 outlook from 23 to 29 cents to 4 to 9 cents, blaming weakness in existing Facebook games and a delay in its pipeline.

The results widely missed expectations set by company management at the end of last quarter, when Chief Operating Officer John Schappert said the company was "excited and comfortable raising guidance for the year."

On a conference call, BTIG analyst Richard Greenfield took Zynga executives to task for not warning investors. Chief Financial Officer Dave Wehner said it was company policy to only give guidance once a quarter.

But the earnings report "doesn't jive" with executives' recently upbeat comments, Greenfield later told Reuters. A handful of plaintiffs' lawyers announced Thursday they had begun investigating Zynga for breach of fiduciary duty.

Meanwhile, Facebook's executives took a conservative approach on Thursday, declining to offer their own forward-looking predictions.

In light of Zynga's bad miss, Wall Street analysts said that the lack of forecasts sapped investor confidence.

"The entire social media space may seem like a disaster, but it's perhaps that public markets have yet to see the right stocks. Firms like Groupon, Facebook, and Zynga require very aggressive user acquisition and the Average Revenue Per User is much lower," said Steve Place, a founder of options analytics firm investingwithoptions.com.

"However, if we look into different verticals of the social media space there are some decent ideas."

He cited real-estate site Zillow, now almost double its IPO price.

But on Sand Hill Road, the mood these days is decidedly more subdued, a focus on returning to fundamental value.

"We'll see more discipline on private investments," with more focus on the sustainability of any competitive advantage a company has, said Roelof Botha, a partner at Sequoia Capital.

"There are private companies that we are investors in that have underlying defensibility and business models for which you do want to stretch on valuation," Botha added.

At Bay Partners in Palo Alto, partners have already noticed a certain dialing-back of the swagger with which some entrepreneurs walk into their office.

"I feel a little bit of humility, a little bit of reality creep in," said partner Salil Deshpande, whose investments include Buddy Media, which was sold to Salesforce.com for $689 million earlier this year. Early-stage entrepreneurs who a few months ago might have argued their nascent companies were worth $5 million might today accept a valuation of $1 million, he said.

Mayfield's Chang expects a hit to companies with what he calls "lumpy" business models -- less predictable, consumer-oriented businesses that rely on advertising and virtual goods, like Facebook and Zynga. Those businesses, he says, are reliant on their popularity with the public, a fickle group.

"The scariest is easy-come, easy-go revenue, kind of like Groupon," he said. "It can ramp up quick, but disappear quickly too."

TORONTO - Prem Watsa, CEO of Fairfax Financial Holdings Ltd. (TSX:FFH), asked analysts not to overemphasize the weight of its 10 per cent stake in struggling Research In Motion, in relation to the size of its multi-billion dollar investment portfolio.

"Please put the additional $190 million we invested in July in RIM in perspective, relative to the $24 billion size of our investment portfolio," Watsa said during a conference call Friday to discuss its improved second-quarter earnings.

The insurance and investment giant recently doubled its stake in RIM (TSX:RIM) after the company announced a new chief executive and revamped board of directors. Watsa —sometimes referred to as "Canada's Warren Buffet" — also took a seat on its board.

Fairfax is now RIM's largest shareholder, with a 9.9 per cent stake in the company, up from about five per cent at the start of this year.

Watsa highlighted that the company has nearly $8 billion in cash and short-term investments — over 30 per cent of the investment portfolio — that it can dedicate to new "opportunities that may come our way."

However, he also predicted more grim times ahead for the world's markets.

"We continue to be very concerned about the prospects of the financial markets and the economies of North America and Western Europe, accentuated by the breaking of the real estate bubble in China in late 2011," said Watsa.

"We think this is a good time to be very conservative."

The company has hedged most of its exposure to equity investments in response to significantly higher stock valuations and economic uncertainty. At the end of its most recent quarter, equity hedges represented 104.2 per cent of its equity and related holdings.

Companies buy hedges — contracts that protect the future value of investments and other assets — during volatile stock markets. However, unexpected share price swings can lead to paper losses on the balance sheet, which must be accounted for.

Fairfax said late Thursday second-quarter profit rose 14 per cent, largely due to improved underwriting results and a jump in revenues from premiums written by its insurance and reinsurance businesses.

However, the improved results from its underwriting and premiums were offset by lower investment gains and lower interest and dividend income during the volatile quarter.

It also booked a $7.2-million loss from its equity hedging strategy, which compared to a $396.6 million gain in the year-earlier quarter. That was largely offset by a $40.9-million gain on equity investments this quarter, compared to a $624.8 million loss during the quarter of 2011.

The Toronto-based financial services company, which reports in U.S. dollars, said Thursday it earned $95 million, or $3.85 per diluted share, up 14 per cent from the $83.3 million, or $3.40 per diluted share during the year-ago quarter.

Fairfax, through its subsidiaries, is involved in property and casualty insurance and reinsurance and investment management.

Shares of Fairfax were down $2.01 to close at $377.99 Friday on the Toronto Stock Exchange.

CAMBRIDGE, Ohio, July 27, 2012 (GLOBE NEWSWIRE) -- Camco Financial Corporation (Nasdaq:CAFI), the bank holding company for Advantage Bank, today announced second quarter financial results for 2012, reporting net earnings of $482,000 or $0.06 per share for the quarter ended June 30, 2012. These results represent an increase of $1.9 million or $0.26 per share over results from the comparable quarter a year ago. Year-to-date results reflect net earnings of $895,000 or $0.12 per share for the six months ended June 30, 2012.

"We are pleased that the efforts we have focused on over the past few years are paying off," said James E. Huston, President and CEO. "We continue to focus on our core strategies that are leading to decreased troubled assets and adding high quality loans to our portfolio funded through low cost deposits."

Classified loans decreased by $3.2 million in the second quarter of 2012, while core deposits increased by $1.2 million over the same period.

"In addition to the positive momentum that has been created, we have also recently announced our intent to conduct a rights offering of common shares of up to $10 million for existing shareholders" said Huston. "This rights offering will raise additional capital for our bank, which we expect to make us a stronger financial institution. Additional details regarding the rights offering can be found in the Form S-1 that we recently filed publically with the Securities and Exchange Commission. Raising this additional capital, combined with the improvements in our loan portfolio and financial results, should continue to lead to favorable performance," Huston concluded.

Review of Financial Performance

Overview:

The following items summarize key activities of the Company during the quarter ended June 30, 2012:

Total assets decreased $19.3 million during the quarter, which reflects cash and cash equivalents used to pay down higher cost single-service CD deposits.

Classified loans (which includes substandard, doubtful, and loss) decreased by $3.2 million in the second quarter.

Net Interest Margin:

Net interest margin decreased to 3.33% in the current quarter compared to 3.50% for the quarter ended March 31, 2012. The margin has also decreased from 3.61% for the same period a year ago, driven by a reduction in the bank's yield on earning assets in this low rate environment. Management expects the Company's net interest margin to decrease slightly as we continue to be in an environment of low interest rates and slow economic growth. We will continue to look for pricing opportunities, further improvement in credit quality, and other balance sheet changes to maintain our margin going forward.

Net Interest Income:

Net interest income before the provision for loan losses decreased $276,000, or 4.5% compared to the prior quarter, to $5.9 million for the quarter ended June 30, 2012. The decrease was attributable to reductions in yield on earning assets in this low rate environment.

The Company's yield on earning assets decreased to 4.47% in the current quarter from 4.76% in the linked quarter. The decreased overall revenue resulted from declining loan portfolio balances, along with changes in the composition of investment balances resulting in a lower average investment yield. Planned continued runoff in certificates of deposits and borrowings combined with growth in core deposits resulted in a reduced cost of funds. The cost of funds for the quarter ended June 30, 2012 was 1.25% compared to 1.36% for the quarter ended March 31, 2012. The Company anticipates continued declines in certificates of deposit balances over the next few quarters as some maturities of single relationship accounts are not renewed.

Provision for Loan Losses:

A provision for loan losses of $137,000 was recorded for the quarter ended June 30, 2012, compared to $1.8 million for the same period of the prior year and $1.0 million for the linked quarter. The allowance for loan and lease loss was strengthened in previous quarters, with relatively little additional provision required in the current quarter. Classified loans (which includes substandard, doubtful, and loss) decreased $3.2 million since March 31, 2012 to $37.3 million at June 30, 2012. The classified loans balance also decreased $10.4 million, or 21.8%, from the year-ago quarter ended June 30, 2011.

Noninterest Income:

Noninterest income was $1.7 million for the second quarter of 2012, which represents an increase of $651,000 when compared to the quarter ended June 30, 2011 and a decrease of $301,000 when compared to the linked quarter. The increased income in the current quarter from the year-ago quarter was driven by an increase in gain on sale of residential mortgage loans. The decrease from the linked quarter was driven by lower value of mortgage servicing rights due to higher prepayment speeds resulting from lower long-term rates, lower amount of prepayment penalties from fewer early loan payoffs, and slightly lower gain on sale of residential mortgage loans.

Noninterest Expense:

Noninterest expense for the quarter ended June 30, 2012, decreased $106,000, or 1.5%, to $7.0 million from the comparable period a year earlier and increased by $321,000, or 4.8%, when compared to the linked quarter. Noninterest expense was lower during the current quarter 2012 compared to the previous 2011 quarter primarily as a result of expenses related to classified assets and real estate owned. The increase compared to the linked quarter was the result of higher expenses related to real estate owned.

Balance Sheet:

Total assets were $766.9 million, which is a decrease of $19.3 million, or 2.5% compared to $786.2 million in the linked quarter, and a slight increase of $990,000 or 0.1% compared to $765.9 million in the same quarter a year ago.

Cash and cash equivalents decreased $12.3 million from the previous quarter. The decrease was primarily attributable to the reduction of single-service CD deposits and borrowed funds as we continue to restructure our balance sheet to rely less on non core funding. We continue to focus on profitable lending opportunities and investments as a means of employing our excess cash, as well.

Asset Quality:

The allowance for loan and lease losses was $14.2 million at June 30, 2012, compared to $15.0 million at March 31, 2012. Loan quality continues to improve and has resulted in a steady reduction in classified assets and non-performing loans.